Yafeng, Qin.
2007. Liquidity and Commonality in
Emerging Markets. Doctoral Dissertation, NUS.
This study investigates the extent to which
liquidity of emerging market stocks co-moves with each other, and tries to
explore the underlying mechanism that drives commonality in liquidity. The
empirical results show that in emerging markets, commonality in liquidity is
significantly higher than that in developed markets, and individual stock
liquidity is more affected by fluctuations in market prices than by
fluctuations in individual stock prices, suggesting that higher commonality in
liquidity in emerging markets could be caused by higher co-variation in stock
volatility and inventory risk. Consistent with this conjecture, commonality in
liquidity is found to be positively related to co-movement in volatility. These
findings reinforce the idea that liquidity commonality is related to
market-wide factor. The study also documents that liquidity co-movement across
emerging markets has a strong geographic component. The initial results do not
support the presence of a global liquidity factor.
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